National Income — Set 2

Correct Answer: D. Net Factor Income from Abroad

• **NFIA (Net Factor Income from Abroad)** = income earned by residents from abroad minus income earned by non-residents within the country. • **Key link: GDP to GNP** — GNP = GDP + NFIA; positive NFIA means residents earn more abroad than foreigners earn here. • 💡 Wrong-option analysis: [Option A] Net Financial Income Assessment: a fabricated term; [Option B] Net Fiscal Income Adjustment: not a real economic concept; [Option C] National Fund for Industrial Assets: a fictional fund name.

Correct Answer: A. Double Counting

• **Double Counting avoidance** = the Value Added Method counts only the value added at each stage of production, not the total output at every stage. • **Intermediate goods excluded** — by summing only value added, the cost of raw materials already counted in earlier stages is not counted again. • 💡 Wrong-option analysis: [Option B] Fiscal Deficit: a budgetary concept unrelated to national income methodology; [Option C] Revenue Leakage: refers to tax evasion not an accounting error; [Option D] Deflation: a macroeconomic price phenomenon, not a calculation error.

Correct Answer: C. Base year prices

• **Real GDP** = GDP measured at base year prices, eliminating the distortions caused by inflation to show actual volume of production. • **Base year prices used** — current production is valued at prices of a fixed reference year (2011-12 in India) to enable true comparison. • 💡 Wrong-option analysis: [Option A] Current market prices: that defines Nominal GDP, not Real GDP; [Option B] International prices: not used in standard GDP calculations; [Option D] Wholesale prices: WPI is an inflation index, not the basis of Real GDP measurement.

Correct Answer: C. Price inflation

• **GDP Deflator** = a price index measuring inflation across all domestically produced final goods, calculated as (Nominal GDP / Real GDP) x 100. • **Broader than CPI/WPI** — it covers all goods and services in the economy, not just a fixed basket like consumer or wholesale indices. • 💡 Wrong-option analysis: [Option A] Industrial output: measured by IIP, not the GDP deflator; [Option B] Population growth: measured by census data; [Option D] Trade balance: measured by export minus import data.

Correct Answer: A. Either prices or production increase

• **Nominal GDP rises** when either prices increase or production increases, since it is calculated at current market prices. • **Inflation illusion risk** — a high nominal GDP growth can be misleading if it is mainly driven by price rise rather than real output growth. • 💡 Wrong-option analysis: [Option B] Prices and production decrease: that would reduce nominal GDP; [Option C] Only production increases: price increases alone also raise nominal GDP; [Option D] Only prices increase: production increases alone also raise nominal GDP.

Correct Answer: A. Total population of the country

• **Per Capita Income = National Income / Total Population** — it represents the average income per person in a country in a given year. • **Standard of living proxy** — it is a rough indicator of average welfare, though it does not reveal income distribution. • 💡 Wrong-option analysis: [Option B] Total number of households: per-household income is a different measure; [Option C] Total area: land area is unrelated to income calculation; [Option D] Total working population: that would give per-worker income, not per-capita income.

Correct Answer: A. Machine installed in a factory

• **Capital Good** = a machine installed in a factory, used to produce goods for other businesses, not consumed immediately in production. • **Subject to depreciation** — capital goods have a long productive life and lose value gradually through use, unlike intermediate goods. • 💡 Wrong-option analysis: [Option B] Fuel used in a private car: a final consumption good, not a capital good; [Option C] Bread bought by a household: a final consumer good; [Option D] Stationery used by a student: a personal consumption item, not used in business production.

Correct Answer: B. Income Method

• **Mixed Income of Self-Employed** = earnings of farmers, shopkeepers, and individual practitioners where wages, rent, and profit cannot be separately identified. • **Used in Income Method** — it is a special category to ensure all factor income is captured even when components are indistinguishable. • 💡 Wrong-option analysis: [Option A] Inventory Method: not a standard national income method; [Option C] Expenditure Method: measures spending on goods and services, not factor earnings; [Option D] Product Method: sums value added by sector, not individual factor incomes.

Correct Answer: A. Flour used by a baker to make bread

• **Intermediate Good** = flour used by a baker to make bread — it is consumed in producing another good within the same year. • **Excluded to avoid double counting** — its value is already embedded in the price of the final product (bread). • 💡 Wrong-option analysis: [Option B] Car bought by a taxi operator: a final good (capital good) used for providing a service; [Option C] Tractor bought by a farmer: a capital good, not an intermediate good; [Option D] Laptop bought by a student: a final consumer durable good.

Correct Answer: D. Depreciation

• **GDP − Depreciation = NDP** — Net Domestic Product accounts for the wear and tear of capital assets during production. • **Depreciation is the only difference** — subtracting it converts the gross measure to a net, more sustainable measure of production. • 💡 Wrong-option analysis: [Option A] Direct Taxes: used to convert Personal Income to Disposable Income; [Option B] Subsidies: used in FC to MP conversion; [Option C] Net income from abroad: that distinguishes GDP from GNP, not GDP from NDP.